Japan Posts Second Consecutive Current Account Deficit; 2012 Account Surplus Lowest on Record

Japan posted back-to-back monthly current-account deficits for the first time since 1981, highlighting challenges for Prime Minister Shinzo Abe’s campaign to revive the economy.

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The shortfall in the widest measure of the nation’s trade was 264.1 billion yen ($2.8 billion) in December, the Ministry of Finance said in Tokyo today. The median estimate of 23 economists surveyed by Bloomberg News was for a deficit of 144.2 billion yen.

Weakness in global demand, a spat with China and increased energy imports because of nuclear plant shutdowns are weighing on the world’s third-biggest economy as Abe pushes the Bank of Japan to end deflation and spur growth.

China Dispute

Exports to China in 2012 fell 10.8 percent from 2011, as slower Chinese growth and a territorial dispute affected a merchandise trade relationship worth 26.5 trillion yen in 2012, according to ministry data.

BOJ Governor Masaaki Shirakawa said Feb. 6 he would step down on March 19, almost three weeks before the end of his term, accelerating a leadership transition that may boost Abe’s campaign for aggressive easing.

Japan posted its smallest annual current account surplus on record in 2012 as exports weakened and energy imports grew, a signal to Prime Minister Shinzo Abe that economic revival needs more than just a weaker yen and extra spending.

The current account surplus is likely to continue shrinking as energy imports rise due to the closure of nuclear power plants and as Japanese exporters lose out to more competitive Asian rivals, economists say.

Japan’s current account surplus was 4.7 trillion yen ($50.4 billion) in 2012, Ministry of Finance data showed, a figure that seems impressive. But it was less than half the surplus recorded a year earlier and the smallest since 1985, when Japan started compiling comparable data.

The deterioration was most marked at the end of the year, with Japan posting consecutive monthly deficits for the first time as the December shortfall hit 264.1 billion yen, more than 80 percent bigger than the median forecast in a Reuters poll.

“Energy imports and higher energy costs are structural factors that will cause the current account surplus to decline further,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co.

“Currency moves can only go so far in improving corporate competitiveness. There are other areas like corporate taxes or incentives for business investment where Japan is lagging.”

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Data last month showed Japan posted a record trade deficit of 6.9 trillion yen in 2012, as exports fell in annual terms through the second half of the year.

The theory is that a weaker yen will reignite the export engine in coming months, but that assumes there will be demand — something Japan’s once-dominant electronic makers are struggling with.

As I have said, this is a case of be careful of what you wish, because you may get it. Inflation is not going to do Japan any good at all in my estimation. Japan’s demographics and energy imports make the situation much worse.